Fed's Economic Policy Must Change

June 17, 2006|Edward Dahmus Boca Raton

It is time for the U.S. Federal Reserve (the Fed) to realize that action that penalizes U.S. consumers and businesses while rewarding foreign consumers and businesses is not sound U.S. economic policy.

I believe that when the Fed raises interest rates, it does little to reduce U.S. inflation, but does a lot to reduce U.S. competitiveness. Many years ago, when the U.S. economy was the predominant world economy, the policies of the Fed had the desired impact because the U.S. economy was in fact the bulk of the world economy.

Now, when Europe and Asia are also economic powerhouses, and when countries such as China and India are competing in the world markets for the same commodities that the U.S. is trying to buy (commodities that the U.S. does not control), a rise in U.S. interest rates reduces U.S. demand for these commodities, but does not necessarily reduce prices (and thus inflation), because of demand from outside the U.S.

And, in fact, if prices for these commodities do fall, the first beneficiaries of these reduced prices are not U.S. consumers and businesses, but in fact are consumers and businesses of other countries. In other words, while U.S. consumers and businesses are forced to cut back, these countries benefit, becoming more productive and competitive. Is this really good for the U.S.? It's time to change.